Construction slowdown boon to industrial leasing

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While San Diego County posted some 5.5 million square feet of gross industrial leasing activity during the first half of the year, the net absorption was not quite so strong. According to a CB Richard Ellis report, gross second-quarter leasing activity slowed slightly to 2.5 million square feet compared to the first-quarter total of 3.0 million square feet.

Warehouse users created the most activity during the quarter, leasing a gross of 735,000 square feet, followed by light industrial with 586,000 gross square feet.

The total net industrial absorption for the first half of 2008 was a relatively healthy 349,000 square feet, but well below the average of 1.2 million square feet for the comparable six-month period for each of the past three years.

Although industrial construction deliveries totaled a mere 187,000 square feet during the second quarter, only 17.0 percent was pre-leased at the time of completion.

"Adequate market demand in existing product helped reduce the impact it had on the vacancy and availability rates. However, the industrial market witnessed vacancy rate increases during five of the previous six quarters," the report continued.

Additionally, the overall industrial space availability rate inched up 4 percentage points during the second quarter to 10.7 percent.

Good leasing activity for all industrial properties during second-quarter 2008 held the direct vacancy rate steady at 7.3 percent -- a negligible increase of 0.1 percentage points from the first quarter.

Not every market had strong net absorption activity. Negative net absorption of 126,000 square feet in Central San Diego coupled with new construction deliveries in Otay Mesa totaling close to 188,000 square feet contributed to the small increase in the countywide vacancy rate.

Otay Mesa led all submarkets in terms of net absorption with 164,000 square feet in the second quarter, followed by Oceanside with 72,000 square feet.

Industrial construction deliveries through June totaled slightly more than 560,000 square feet, compared to approximately 2 million square feet of construction deliveries recorded through the first half of last year.

CB Richard Ellis reports a total of 1.2 million square feet of industrial space under construction throughout the county, with more than 600,000 square feet of that being built in South County. Another 312,000 square feet is being constructed in Central San Diego.

While exact projections weren't available, current construction projections call for considerably less industrial space than the 2 million square feet of new construction completed in 2007.

Construction has slowed considerably over the past two years. The amount of activity has decreased from more than 4.5 million square feet at mid-year 2006 to just under 1.2 million square feet at the end of second-quarter 2008.

In short, the slowdown in construction appears to be providing ample time for existing projects to lease up.

The countywide asking average lease rate dropped 6 cents in the second quarter, from $1.16 to $1.10, which was also equal to the second-quarter 2007 rate.

Corporate headquarters space had the highest lease rate ($1.67), followed by multitenant R&D ($1.15). The product type with the lowest asking lease rate was warehouse space (67 cents), followed by light industrial (93 cents) and multitenant industrial at 98 cents. Overall, the San Diego County industrial market is said to be weathering the economic slowdown and maintaining a strong pace through 2008.

Decreasing construction deliveries and the ever-shrinking availability of developable land are expected to continue to create competition for existing product and temper any vacancy increases.

"Industrial properties in San Diego County are proving to be irreplaceable assets," the report concludes, "even through the toughest economic conditions."